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India’s Forex reserves is on the rise, will the Government use it to fight COVID 19?

When entire country is under lockdown due to the pandemic COVID19, there is something to cheer about for India. India’s foreign exchange reserves are rising and are expected to hit the $500 billion mark soon. In the month May, it jumped by $12.4 billion to an all-time high of $493.48 billion.


Leaving behind the 1991 crisis

Many youngsters are not aware of the Forex crisis of 1991, when India had to pledge its gold reserves to escape a major financial crisis. India can now confidently depend on its soaring Forex reserves to tackle any crisis on the economic front. There has been a massive increase of 8,400 per cent in the level of Forex from $5.8 billion as of March 1991 to the current level.

What are Forex Reserves?

Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 has been enacted to set the legal provisions for governing the foreign exchange reserves in the country.

The Central Bank of the country accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.

The Forex reserves of India consist of below four categories:

Foreign Currency Assets

Gold

Special Drawing Rights (SDRs)

Reserve Tranche Position


According to the International Monetary Fund (IMF), official Forex reserves are held to promote and maintain confidence in the monetary policies and exchange rate management including the capacity to intervene in support of the national currency.

It will also minimizes external vulnerability by maintaining liquid foreign currency to absorb financial shocks during times of crisis or when access to borrowing is curtailed.

Why is Forex rising despite the slowdown in the economy?

The rise in inflow of foreign portfolio investors in Indian stocks and foreign direct investments (FDIs) is the major reason for the rise in forex reserves. In the last two months, foreign investors had acquired stakes in several Indian companies.

It is expected to rise further and soon it will cross the $500 billion mark as Reliance Industries subsidiary, Jio Platforms, has engaged in a series of foreign investments totaling Rs 97,000 crore.

Similarly, the steep fall in the global crude oil prices has brought down the oil import bill, saving the precious foreign exchange.

Due to prolonged lockdown,  overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion.

What’s the significance of rising forex reserves?

At the time of falling GDP growth rate, the rising forex reserves give a safety cushion to the government and the RBI in managing India’s external and internal financial issues. It’s a big relief in the event of any financial crisis and enough to cover the import bill of the country for an entire year.


The rising Forex reserves have also helped the rupee to strengthen its position against the dollar.

As of now, the forex reserves to GDP ratio is around 15 per cent.

Such huge Forex reserves will provide a level of confidence to markets that a country can meet its external obligations and can back its domestic currency.

What does the Central Bank do with the forex reserves?

The RBI functions operates within the overall policy framework agreed upon with the central government and it act as the custodian and manager of forex reserves.

The RBI uses the reserves for specific purposes such as maintaining the value of rupee against dollar.

Where are India’s forex reserves kept?

The RBI Act, 1934 provides the legal framework for the deployment of reserves in different places like foreign currency assets and gold. Around 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US. 28 per cent is deposited in foreign central banks and 7.4 per cent in commercial banks abroad.

The share of gold in the total foreign exchange reserves has also increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020 in value term.

Conclusion

Many known economists has suggested that the forex reserves should be used for infrastructure development in the country. However, the RBI had opposed the plan. At the time of pandemic when entire country is on halt, this reserve is a big relief for the government and it will help our country to maintain its position in the global market.

 

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